Decadent Deals

Consumers are sweet on premium
indulgence food brands

During the Great Recession, most Americans traded down—swapping specialty stores for their mass and dollar cousins and forgoing their favorite brands for their private-label counterparts.

Generally, food products followed this pattern. In fact, sales of private-brand foods rose to a record high of $88.5 billion in 2010, up 8% from just three years earlier.i

But there’s an exception to every rule.

And in this case, it comes in the form of edible indulgences.

Even during the worst of the recession, segments of consumers displayed a willingness to pay a premium in small- indulgence categories, such as chocolate, frozen treats and premium spirits, all of which outperformed the broader CPG industry as consumers sought out “affordable luxuries.”

Now, with consumer spending on the rebound, these premium indulgence categories show no signs of slowing down.

Why? Despite strong desire for healthy options, consumers enjoy small indulgences. In fact, a recent study found that 73% of consumers put taste first when making a snack choice, well ahead of convenience and nutritional value, which was a distant third.ii

As a result, indulgence brands make great potential targets for strategic interests or private equity investors.

Would-be investors should look for several important features in a winning indulgence brand. Yes, taste is king. But that’s not enough. Successful brands also capitalize on prevailing food trends such as a renewed interest in authenticity and artisanal and local products, with a focus on exotic flavors and formulations that appeal to the increasing sophistication of the U.S. consumer palate.

As the following case studies demonstrate, there are plenty of scrumptious investment opportunities to be had in premium indulgence categories.

Ultra-Premium Ice Cream

The ice cream category would be sweet for any investor, considering that 55% of consumers say they would splurge on a frozen treat—more than for any other category.iii

The ice cream category was historically dominated by regional premium brands like Breyers, Dreyer’s or Blue Bell, depending on where you were buying it.

That was until Häagen-Dazs and Ben & Jerry’s came along, essentially creating a new consumer category in super-premium frozen treats and going on to drive immense growth in that category.

In fact, sales of super-premium take-home ice cream grew at a combined annual growth rate of 4.8% from 2010 to 2013—compared to just 1% for all other classes of ice cream.iv

Super-premium frozen treats are classified as having premium ingredients, better taste, a greater variety of flavors and tremendous innovation. Plus, their smaller container sizes allow families to personalize their ice cream purchases—instead of compromising for a big bucket of vanilla or chocolate—and support higher-end brands’ premium positioning.

Now, ultra-premium brands are shaking up the market again. The brands, which include new forms and textures, like gelato, exotic and trendy flavor profiles—think salted caramel and espresso—and local, natural and organic positioning, are driving current category growth. (See Exhibit 1.) Brands like Talenti—acquired by Unilever in December 2014—and Three Twins exemplify this growing segment.

The ultra-premium ice cream category is rich with potential targets, but among them, Jeni’s Splendid Ice Creams stands out. This ultra-premium brand has pioneered the creation of highly unique flavors that use only ultra-fresh ingredients from local producers and exclude commercial mixes and stabilizers that are used even by many other small ice creameries.

Since 2009, Jeni’s has grown from a single wholesale account (Dean & DeLuca) to over 1,700 retailers in the natural, gourmet and conventional channels. Jeni’s owes this growth to its high-end positioning, including high-quality, natural ingredients and a simple, modern package design, paired with the local authenticity stemming from its 20 scoop shops, which stretch from its home town of Columbus, Ohio, to Nashville, Chicago and New York City. It’s no wonder U.S. News & World Report named the brand “America’s Best Ice Cream” in 2012.

Craft Beer

Craft beer—sold by breweries that are typically small and independent and which is brewed by traditional methods and in innovative new styles—is booming. In fact, the number of U.S. breweries increased 80% from 2000 to 2013. Plus, craft beer production has averaged 12% annual growth since 2007, and craft beer sales now represent 8% of the total beer market.v

As is the case with premium ice cream, craft beers are also carrying the market as a whole. In 2013, craft beer unit sales increased 17%, as illustrated in Exhibit 2, while the overall beer market declined 2%.

This impressive growth can be explained by product innovation and new styles. And as beer becomes more like wine for a certain segment of consumers, consumers will shop first by style, then by brand.

As a result, the psychographics of craft beer consumers are extremely positive—they tend to be brand loyal but also willing to try new brands and styles; they view craft beer as an affordable luxury and think the cost of craft beer is a small price to pay for the taste benefits. (See Exhibit 3.)

Given all this, investor action in the space has been hot recently, with The Riverside Company investing in Utah’s Uinta Brewing Company and Oregon-based 10 Barrel Brewing Company getting snapped up by Anheuser-Busch InBev.

Still, there are plenty of good targets remaining. One is Lagunitas Brewing Company. This Petaluma, Calif.–based craft brewer is the fifth largest in the United States, with an estimated $75–$100 million in revenue in 2013 from 800,000 kegs. And Lagunitas shows no signs of slowing down. The brewer opened a $26 million facility in Chicago in 2014, which will add another million kegs of capacity, more than doubling Lagunitas’ potential output.

Premium Cookies

Last, but not least, is the classic cookie, which is undergoing quite the makeover. Indeed, the premium cookie segment grew nearly 50% more than the category as a whole in 2013—and more than 60% faster than non-premium cookies—a trend that is expected to continue over the next five years.

That’s because premium cookies significantly outperform traditional brands on taste, quality and texture, as illustrated in Exhibit 4. These are far and away the most important purchase drivers for consumers, with 78% of consumers saying taste is very important, 49% saying quality is very important and 48% saying it all comes down to texture.

One example of this new-wave cookie is made by Salem Baking Co., which makes Moravian cookies—the thin, crisp ginger or sugar cookies popular during the holidays. A decade ago, the company made fewer than 10 flavors. Today, it churns out more than 30 varieties—1 million pounds of cookies in total each year—including a ginger cookie topped with blue cheese, walnuts and honey.

Or consider Dancing Deer Baking Company, a mail-order bakery specializing in all-natural, Kosher baked offerings that also sells its sweet wares in mass and specialty food stores across the United States, including Whole Foods.

Within this promising category, Brownie Brittle is a sweet potential target. Just like it sounds, these innovative snacks combine the rich flavor of a brownie with the crunch of a cookie. The founder-owned company has roughly $40 million in sales and distribution in stores like Safeway, Costco and Sam’s Club, in addition to a thriving e-commerce business.

As these examples demonstrate, premium indulgence brands are breathing new life into certain key food categories. So go on, indulge a little. You’ll be glad you did.